Total Factor Productivity Growth and Structural Change in Transition Economies

1
Total Factor Productivity Growth and
StructuralChange in Transition Economies

• El-hadj BahArizona State University
• and
• University of Auckland
• Josef C. Brada
• Arizona State University
• and
• Macedonian Academy of Sciences and Arts

2
Closing pcy Differences Between Old and New
Members

• Growth accounting literature (Solow (1957),
  Prescott (1998) and Hall and Jones (1999), etc.)
  stresses
• Changes in total factor productivity (TFP)
  account for the largest part of economic growth.
• International differences in TFP account for the
  bulk of international differences in pcy.

3
Income/Productivity Convergence
Source EU
4
Contributions to potential growth (period
average) of
Source EU
5
Income/Productivity Convergence is Accompanied by
Structural Change

• Kuznets (1966) pervasive pattern of structural
  change accompanying economic development.
• Over-industrialization, over-agrarianism and
  neglect of service sector under Communism
  (Gregory, 1970 Ofer, 1976) due to ideology and
  common sense.

6
Agricultures Share of Employment
Source EU
7
Industrys Share of Employment
8
Market Services Share of Employment
9
Why worry?

• Can TFP growth continue?
• What are the effects of structural change on TFP
  growth?

10
Barriers to Continued TFP Growth in New Members

• Reforms cease better institutions yield higher
  TFP.
• Outward opening slows globalization and FDI
  inflows raise TFP.
• Granick - Prescott effects wear off.
• EE has a poor record of TFP growth.

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EEs record of TFP

• Slowdown in Soviet TFP growth noted in 1960s
  (Kaplan, 1968).
• We were confused by Weitzman (1970) and Easterly
  and Fischer (1995).
• Studies of EE economies used variety of models
  statistical techniques but all came to the same
  conclusion. By the early 1980s, only source of
  growth was extensive TFP was zero.
• If determinants of the level of TFP are slow to
  change, current TFP growth may be temporary

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Structural Change

• Is the structural change we have seen in EE a
  source of positive change in TFP?
• Development literature (e.g.,Herrendorf and
  Valentinyi (2006) Hsieh and Klenow (2007)
  Bah(2008)) suggest that TFP levels differ among
  sectors.

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Why Not Apply Growth Accounting to Transition
Economies ?

• Sectoral Data Not Available.
• Even Aggregate Capital Stocks Suffer from Major
  Defects (Campos and Coricelli (2002)).
• Large but unmeasured depreciation and abandonment
• Moral depreciation large changes in pattern of
  production and in technology
• Estimates of TFP depend critically on revisions
  of official data (Izumov and Vahaly (2006,
  2008))

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This Paper

• Builds a dynamic 3 sector (Agriculture, Industry,
  Services) model
• Calibrates the model using US data
• Calculates Austrian sectoral TFP using Austrian
  sectoral labor allocation
• Compares Austrian TFPs to those of transition
  economies

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The Model

• Key features for labor reallocation across
  sectors
• Non-homothetic preferences and agricultural TFP
• growth drive labor out of agriculture
• TFP growth differential and elasticity of
  substitution
• between industrial and services output drive
  labor reallocation in those 2 sectors.
• Closed economy

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Preferences

• Household lives forever, supplies labor to 3
  sectors, earns income.
• Utility

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Technologies

• Agriculture uses only labor and land (L1), and
  is only used for consumption. With NA the
  agricultural labor,

where
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Technologies

• Industrial output can be consumed or invested.
• where
• The law of motion of the aggregate capital stock
  (K) in the economy is given by
• where d is the depreciation rate.

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Services

• Services are only consumed.
• where

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Solving the Model

• A competitive equilibrium is a set of allocations
  and prices such that(i) Taking prices as given,
  the householdmaximizes lifetime utility subject
  to its budgetconstraint(ii) Taking prices as
  given, the representativefirm in each sector
  maximizes profits(iii) Markets clearEquivalent
  to a social planners (SP) problem

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SP Model

• Choose

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Calibration to US Data 1950 - 2000

• Aa 1 in 1950
• Am 1 in 1950
• As 1 in 1950
• Ãa 0.24
• a 0.70 (T)
• ß 0.975
• d 0.05

e 0.335 (U) ?m 0.019 (T) ?s 0.009
(T) ? 0.01 (U) T 0.03 (U)
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Apply Model and Calibrated Values to Austria and
New EU Members

• Austria as a comparator
• Per Capita Incomes as of EU-15 Average
• Country 1997
  2005
• Austria 112.9
  113.3
• Czech Republic 61.9
  67.8
• Estonia 35.0
  51.7
• Latvia 29.8
  43.1
• Lithuania 33.3
  47.1
• Hungary 45.5
  57.2
• Poland 40.1
  46.0
• Slovak Republic 42.3
  50.1
• Slovenia 64.5
  75.0 (source EU)

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Intuition for Solution

• At a heuristic level, given the calibrated
  preference
• parameters
• Employment in agriculture determines agricultural
• TFP.
• Relative employment between industry and services
  determines relative TFP between them.
• Aggregate GDP per capita determines the levels of
  TFP in industry and services.

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Austria
26
Bulgaria
27
Czech Republic
28
Estonia
29
Hungary
30
Latvia
31
Lithuania
32
Poland
33
Slovak Republic
34
Slovenia
35
AG TFP vs Austria
36
IND TFP vs Austria
37
SERVICES TFP vs Austria
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Rankings of Sectoral TFPs Relative to the US -1950

• Country Ranking
• Bulgaria INDgtSERgtAGR
• Czech Republic AGRgtINDgtSER
• Estonia AGRgtINDgtSER
• Hungary AGRgtINDgtSER
• Latvia INDgtAGRgtSER
• Lithuania INDgtSERgtAGR
• Poland INDgtSERgtAGR
• Slovak Republic AGRgtINDgtSER
• Slovenia INDgtSERgtAGR

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Loss of GDP per capita due to structural
transformation (as of 1995 GDP per capita)

• Country Loss
• Austria 1.28
• Bulgaria 0.95
• Czech Republic 2.29
• Estonia 3.83
• Hungary 2.31
• Latvia 4.47
• Lithuania 6.55
• Poland 2.74
• Slovak Republic 4.44
• Slovenia 3.16

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Policy Implications

• Sectoral differences are important
• In some countries catch up is hampered by poor
  performance in one or more sectors
• Structural change not a major drag
• Specific policy measures depend on how we believe
  TFP is determined
• Research question Is sectoral TFP performance
  linked to nature of reforms such as
  privatization, governance, regulation, etc. ?

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• Thank you.